Retail
I'm a retail junkie who loves to see who is doing what...and to whom

RH has an unusual strategy for a retailer these days: be a retailer. (Photo by Rachel Murray/Getty Images for RH)

Gary Friedman is too much of a class act to say it out loud, but you know he’s got to be thinking it: “I told you so.”

After reporting some simply outstanding numbers earlier this week and watching the stock of the company he runs – RH – go up a mind-boggling percentage in just one day, Friedman would certainly be entitled to a little snarky trash-talking after the bashing he and the company, not to mention its stock, had taken over the past year and a half.

However there was none of that in his letter to shareholders or on his call with analysts this week. That said, you could certainly read between the lines in some of his comments:

“We spent a good 18 months marching through hell in this company. And it's nice to get a taste of heaven on the other side.”

RH has reached that other side with a rather unusual strategy for a retailer these days: be a retailer. That's unlike virtually every other store operator this side of TJX and the dollar stores that is scrambling to close doors, pare down expenses and circle the merchandising wagons. Maybe some of them are talking "Brave New World" but most are still projecting that out to some star date in the future.

Not RH. From the depths of the Great Recession, when Friedman was taking his first steps reimagining the company by dramatically trading up its product mix, presentation and persona, RH has zigged while everyone else has zagged. In an interview at that time he told me, “If we’re going to go down we’re going to do it big and with style.”

It’s Friedman’s prime directive and he’s not hesitant to talk about it. “We're running our business in a very unique way. We're pretty counter to almost everybody in the industry. People are shrinking the size of their stores and closing the stores, we're building the biggest specialty stores the world's ever seen.”

This goes beyond just RH’s stores, according to the Seeking Alpha transcript of this analysts call. “People are eliminating catalogs, where we're mailing inspiring source books that rival some of the best produced magazines in the world," Friedman said.

“If you look at how we merchandize and assort our business, just moving from (a) promotional model to a membership model, I mean just about every aspect we take we tend to be the others, we tend to be going the opposite direction and not because like we're just hey, we should go the other way, but I would tell you most of the winners in the world when you really look at whether it's countries or businesses or cultures or individuals and so on and so forth.

The ones that tend to really win tend to be doing something unique. Because they have better insights than other people.”

So, take that American retailing.

The RH strategy is based around a couple of basic elements:

Build showcase stores – Friedman hates when you call them anchors – that really present the brand at its best. There is an ever-growing number of them already, in such key markets like Houston, Los Angeles, Atlanta and Chicago. Four more are on the books for this year, including a new gallery in New York City’s Meatpacking District, a 90,000-square-foot complex on the site of the old Pastis restaurant.

RH has focused on showcase stores that present the brand at its best. (Photographer: Michael Nagle/Bloomberg)

Make these stores about more than shopping for furniture, which Friedman is the first to tell you is not a high-frequency event. New stores include restaurants, bars and other food services and these could amount to a third of their footprints with an overall business of several hundred million dollars. The new New York store will include a rooftop restaurant and—going even further—the first RH Guesthouse hotel will open around the corner next year.

Online accounts for nearly half of the company’s revenue but Friedman sees it declining as a percentage to perhaps 35% or even 25% by the time the physical store build-out is completed. That said, it has increased the frequency of its massive source books and continues to use them as the prime direct-to-consumer marketing vehicle. With online less profitable than in-store, Friedman says he is indifferent where the customer pulls the trigger. “Quite honestly we’re kind of ambivalent where the sales fall. I can’t influence whether someone is going to place the order… we just want to kind of build the net if you will that we catch the customer.”

Getting the back of the office to run more efficiently is also part of the game plan. RH has cut its number of DCs from four to two and is working on improving its delivery process, eliminating some of the handoff steps that plague the furniture business and increase damages…and ultimately returns. The initiation of its membership program, while structured as a customer loyalty program, is just as much about smoothing seasonal highs and lows in sales, inventory levels and the ability to offer a better shopping experience at the store level outside of sale driven scheduling.

Seventeen years ago Friedman – having been passed over for the top spot at Williams Sonoma – joined what was then Restoration Hardware, a store known as much for its kitchen and housekeeping doodads and mission-style furniture as for its money-losing ways. Since then there been some ups and more than a few downs, but its recent revival has been nothing short of astonishing. The stock price has quadrupled over the past 52 weeks, remarkable for any non-tech company, insanely unbelievable for a retailer.

So when Friedman talks about his ultimate Restoration project, you have to listen: “It's just looking at things different, [with] that same creativity, that same approach, the same cross functional collaboration that helps us architect an integrated solution."

“And we're having a blast, we're finding things that like, ‘Oh My God, we feel stupid for doing it the other way for so long,’ but you couldn't be more exhilarated to find like every problem is an opportunity.”